Remnant sales are becoming a common method used to increase asset recovery for creditors. Trustees and plan administrators are generating additional recoveries for creditors by selling off the remaining “cats and dogs” in a bankruptcy estate for cash, even in situation in which there are no remaining known assets. Beyond generating additional cash, the parties involved also find that catch-all remnant sales accommodate the expanding notion that bankruptcy cases need to get to final decree rather than lingering.
This article explores these sales, taking into consideration several key constituencies – the trustee/estate, creditors, the Office of the U.S. Trustee (OUST), and Bankruptcy Court. While the article focuses on Chapter 7 and 11 commercial bankruptcy situations, the same opportunities may exist in assignments for the benefit of creditors, receiverships, estates after a Section 363 sale, other wind-downs/dissolutions, and even certain “run of the mill” restructuring engagements.
The large number of corporate bankruptcy filings in the period from 1999 to 2003 created opportunities for a wide array of providers within the turnaround industry, including law firms, restructuring firms, wind-down specialists, and claims agents. Yet, with the reduction in sizable corporate filings in 2004 and beyond, there was little incentive for professionals to get old cases wrapped up and to final decree. As a result, many “moldy” cases remain open today.
However, recent increases in corporate filings, which are expected to continue over the next 18 to 24 months, have provided additional incentive to wrap up old cases. Trustees and plan administrators need to close old cases to make room for new ones. This makes good sense to those involved, because the majority of recoveries for creditors typically already have been generated in these cases. Similarly, fees for most professionals are generated early in cases and engagements. As these matters linger, billings usually drop significantly, making it more effective to wrap up the cases and move on as quickly as possible.
In many regions, Bankruptcy Courts and the OUST also are pushing parties to get cases to final decree. Panel trustees can be required to provide justification for cases that go beyond a three-year target timeframe. As new filings increase, this push to clear out the old cases should continue to escalate.
Certainly, these are good reasons for some cases to stay open for long periods of time. Occasionally, a single piece of litigation may be pending that could have a dramatic impact on payouts to creditors. However, this tends to be the exception rather than the rule.
Many cases stay open for long stretches simply because of lack of attention. These older cases have increasingly sparse dockets, with recent entries few and far between. “Case fatigue” often has set in, and there is little motivation to wrap it up. Professionals are busy with other unrelated matters or worse, they aren’t busy, which may produce a somewhat misguided desire to hold on to older cases.
However, additional returns generated for creditors at these late junctures are typically nominal at best. They often are outweighed by the costs associated with keeping a case open, such as fees paid to OUST, claims agents, and other professionals. Practically speaking, it makes sense for professionals to do some housekeeping now to get old cases off their desks. By doing so, they position themselves to pursue new opportunities without being bogged down in old work.
Known, Unknown Assets
By the time a case nears final decree (and/or has been open for many years), the assets believed to have meaningful value have all been monetized. The company has reorganized or been sold under Section 363, and the residual trust/estate has pursued all key causes of action. In a liquidation scenario, any valuable real estate, equipment, and other hard assets have been sold off to the highest bidders. Nonetheless, experience suggests that there is almost always something left for a catch-all remnant sale that can provide additional funds for the estate.
An effective method for selling remnant assets is to identify one or more remaining intangible assets of limited value. This may include old default judgment, collections accounts, class action claims, unpaid trade claims in other bankruptcies, restitution payments, rights to utility deposit refunds, and even the rights in Chapter 11 cases to distributions returned as undeliverable after the final decree.
Even if no specific assets can be identified, a remnant sale still can be completed. A buyer in a remnant sale typically purchases rights to all “known and unknown” assets. If there are no known assets, certain buyers nevertheless are willing to pay a small amount of cash to purchase the rights to unknown assets. A buyer making such purchases operates on the premise that enough small-dollar items may appear down the road to justify the risk. Such deals often are highly risky for a buyer and require an experienced individual comfortable with the possibility of losing capital.
Sometimes a restructuring professional is reluctant to move forward with a remnant sale because of a long-shot potential for a large recovery in the future on a particular item. This needn’t preclude such a sale. In such instances, a remnant sale should be structured to provide an up-front cash payment at closing, together with a percentage share for the estate above a certain recovery level on any individual item. This provide the estate with an “insurance” plan if a large recovery materializes, yet also insulates it from being forced to deal with insignificant amounts of cash after the final decree.
Professionals turn to remnant sales for a variety of reasons. These include to:
Maximize case for creditors. The aim of estates is to maximize recoveries and therefore cash distributable to creditors. A remnant sale helps to achieve this aim by selling the last parts of an already picked-over carcass. Any additional cash generated from leftover assets is accretive to the creditors. For a concerned seller, any issue regarding the pricing of a remnant sale can be addressed by filing notice with the Bankruptcy Court of the intent to sell the remnants subject to acceptance, overbid and court approval.
Historically, the rights to remnant assets often were abandoned by an estate or donated to charities. While charitable donations are certainly noble, they do not generate any additional cash for creditors and therefore should be a last resort if a remnants sale cannot be achieved.
Deliver certainty. A remnant sale allows an estate to monetize with certainty items that may or may not ultimately pay out in the future. For example, a claim in a class action case could yield a modest payout to the estate a couple years down the road. Generally, it’s in the creditors’ best interest to see such an asset sold for cash today rather than continue to retain a “hope certificate” for several years.
Provide a complete and final close. Perhaps the most functional aspect of the remnant sale is that it provides the professionals involved with a complete and final closing of the case. This prevents issues that can arise when a modest-sized check – $1,000 for a utility deposit refund, for example – arrives a year or two after the final decree.
Trustees indicate a strong preference to avoid the dilemma that comes with such a check. On the one hand, it’s too small an amount to reopen the case and make another distribution; on the other hand, there arguably is a fiduciary responsibility not to simply let such a check expire uncashed. The buyer in a remnant sale already has paid cash for the rights to these types of items from the estate, thereby eliminating the issue entirely for the professionals down the road.
A remnant sale allows an estate to monetize with certainty items that may or may not ultimately pay out in the future.
Address the OUST’s aim to wrap up cases. A remnant sale also provides a path to address the desire of both the OUST and many Bankruptcy Courts to get older cases wrapped up. This trend appears to be gaining momentum and is likely to continue as new filings increase in coming months.
Free professionals to focus on winning more business. Finally, a remnant sale can clear away clutter from a professional’s workload and allow the individual to better identify and pursue more lucrative new business opportunities. Now might be a particularly good time to pursue such sales in an effort to wrap up loose ends prior to year-end and the expected increase in restructurings.
Professionals are using remnant sales in commercial bankruptcy cases of all shapes and sizes. In recent months, for example, successful remnant sales occurred in the mega case of a technology provider in the District of Delaware, a large supermarket case in the Northern District of Illinois, a mid-sized financial services case in the District of Massachusetts, and a small Internet retailer case in the Southern District of New York.
Specifically, in a recent Delaware case, the liquidating trustee wanted to find a way to bring in extra cash, prepare for a clean and final close, and address the issue of distributions returned to the estate as undeliverable after the final decree. The trustee explored the options and ultimately decided that a remnant sale was in the best interest of the estate. He subsequently completed a non-recourse remnant sale that included rights to remaining default judgments, undeliverable distributions, and any other known or unknown assets.
In another recent case, the chief wind-down officer of Eagle Food Centers used a remnant sale to raise cash today for remaining claims that likely would not generate any payouts until well after the final decree. In the InsurAmericorp case, the trustee was receiving small commission checks each week that would continue well in the future, but that were immaterial to the overall value of the estate. Rather than continue to drag the case out, he completed a remnant sale that included the uncertain commission stream and any other unknown assets.
Wrapping It Up
Turnaround professionals are heeding recent calls by OUST and the Bankruptcy Courts to get cases wrapped up. Many practitioners find that remnant sales of all remaining known and unknown assets is an effective way to maximize recoveries for creditors, minimize the potential for disruptions after the final decree, and free them to pursue new business assignments.